After the 'pause': Trump's trade threat shows how it benefits everyone

Has American President Donald Trump retreated from his hardline stance on tariffs? There are now 50 days left till July 8, when the “90-day” pause that he had declared on his retributive tariffs on the entire world expires. In this period, he has announced only one trade deal, with the United Kingdom (UK), which is relatively limited in scope and which leaves the 10 per cent base tariff Mr Trump intends to impose in place.

  But he has also retreated from his harsh line on the People’s Republic of China in particular. Last week, he declared an independent pause on imports from the mainland that took tariffs down to 30 per cent. That includes two components — the 10 per cent baseline tariff and a specific 20 per cent tariff that is supposedly a penalty imposed because Beijing has not cracked down on trade in the addictive drug fentanyl.

  China had been left out of the original comprehensive list of countries being hit with what Mr Trump inaccurately described as “reciprocal” tariffs. Instead, the United States (US) administration placed prohibitively high tariffs on Chinese goods, which amounted to a virtual embargo in most cases. It quickly became clear, however, that this was overconfidence. News began to emerge of empty container ships and under-utilised ports in the US. Trade will stop only with a lag of a few weeks, at which point prices would increase. Mr Trump retreated before those weeks were up. 

It is generally accepted that it was not the falling stock market that intimidated his administration but rumblings in the bond market. When a country has to start paying attention to the bond market, you know that things are going very wrong. That is the position in which Mr Trump found himself in April, when yields on US T-bills began to climb.

  But the larger question is surely how he now thinks about tariffs in general. Does he still intend tariffs on the scale that he announced before the pause? Or will he take a few high-profile “wins” such as he received from the UK and settle for just the 10-per-cent baseline tariff?

  His own administration continues to be sharply divided on the subject. Those with a background in finance, including Treasury Secretary Scott Bessent, continue to argue in public that new deals will be made that will keep trade flowing. Meanwhile Mr Trump’s special advisor on the subject, Peter Navarro, still maintains that the US needs high tariff walls to reindustrialise, and has publicly welcomed a shrinking US economy as signs that his bitter medicine is taking hold.

This equivocation has had three effects. On the one hand, it has encouraged countries with nothing to lose — like Britain — to negotiate deals with the US. On the other hand, it has reduced the urgency felt by bigger prizes that are tougher customers on trade — such as, for example, the European Union. 

  But the uncertainty has also increased the urgency felt by other nations in concluding trade deals. India’s agreement with Britain is one such, but there are others in the pipeline. Mr Trump forced the world to stare into the abyss of what a global economy without trade would look like, and most have rightfully turned away from it. 

  Some imagine that the global economy could run without China, the manufacturing centre of the world. That would certainly enable manufacturing growth in other developing countries, including India. But the adjustment cost would be very high, particularly if Chinese companies are not allowed to invest in the new manufacturing locations.

  It is also hard to imagine a global economy without the US, which serves as the consumer of last resort. Countries that run a trade surplus with nobody else can still manage one with the free-spending Americans. India is just one example of this phenomenon. Rebalancing trade in the absence of US import demand is unimaginable.

  Nor are countries happy with the prospect of having to choose between the two. Chinese President Xi Jinping may speak of “dual circulation” — the creation of two economies within his country, one that seeks integration with the US and one that serves China-centric demand networks — but many smaller economies will find that impossible. Large Japanese conglomerates, and perhaps some European sectors, might manage it. In general, though, creating two parallel global trade networks — one centred round the US and one centred round China — seems infeasible. There would be serious losses of efficiency, and any barrier between the two would be practically impossible to police. The US commerce department is not set up to investigate every shipment into the country to determine if it meets rules-of-origin requirements. If it tried, that would again amount to a virtual embargo.

  Therefore, as in any dispute of this kind, the obvious end state is already visible — it’s just that getting there requires some people to take political hits, and so it’s a long and painful process. And Mr Trump, who does after all love tariffs, might surprise us all by forcing his country to go through a few years of extreme pain before recognising reality. 

But the chances are that, after the pause is done, the US will likely maintain some baseline tariffs, if not high enough to make inflation race away or destabilise federal finances. China will endure higher barriers on its direct imports — not just from the US, but from those concerned about post-tariff dumping in their markets — and seek to evade those barriers through third countries. A certain amount of inefficiency will be introduced into global trade, but not so much that it shuts down. Central banks worldwide will have to deal with greater inflationary pressure in their economies, and growth will slow everywhere but not crash.

This is not ideal, but it could be worse. Many people have written obituaries of globalisation since 2016, but it took Mr Trump to show how hard globalisation is to actually kill. The complaints about globalisation are meaningless in the face of the cold fact that it’s made everyone, especially Americans, better off.  

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The author is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi